Do you know this variant of the rule of 25 for retirement? – 12/28/2023 – From Grain to Grain

Planning for retirement is a challenge for most individuals. Between interest rates, inflation and the stock market, creating a financial plan can be out of the question. Fortunately, pocket rules like the rule of 25 provide a compass for navigating this maze.

The rule of 25 suggests that you should accumulate 25 times your annual costs to have a comfortable retirement.

Under this rule, you can withdraw 4% from your retirement portfolio in the first year, adjusting the amount for inflation in subsequent years. This rule is based on the premise that your portfolio should last 30 years. For example, if you have saved $1,000,000, you can withdraw $40,000 in the first year, and simply update the withdrawal amount for inflation in subsequent years.

This strategy was popularized by the study known as the “Trinity Study”, carried out by three professors at Trinity University in 1998. This study, carried out by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, analyzed the feasibility of various rates of retirement withdrawal over different periods.

The study concluded that this 4% rate is generally safe. However, it is crucial to consider individual factors such as lifestyle and expenses.

This rule tells you how much you need to accumulate in total to retire. However, it does not guide you on what to do to reach this amount.

There is a different way of thinking about a rule of thumb that tells you exactly what to do.

A variant of this rule involves saving 25% of your salary for 25 years, aiming for a real return of 6% per year. This approach, too, aims to accumulate a portfolio sufficient to live on your current income. However, there is a guide on how much to save, for how long and what return to seek on investments.

For example, if you earn R$10,000 per month, you need to save R$2,500 per month, which is equivalent to 25% of this income, for a period of 25 years and seek 6% of real gain, that is, above the inflation. Thus, you will be able to withdraw this same income of R$10,000, at today’s values, for a period of 30 years.

Therefore, your objective is to invest in assets that jointly yield IPCA+6% per year.

These methods, although simplified, highlight the importance of planning and financial discipline.

Saving a significant portion of your salary and investing wisely are essential. Such strategies, although they do not guarantee results, offer a tangible path to retirement security.

In summary, while the rule of 25 offers a guide to the amount needed to accumulate, the 25% salary savings variant for 25 years has the advantage of giving you, in addition to an accumulation period, a monthly target to be achieved and a return objective.

Both highlight the need for prudent and personalized financial planning. Consulting an investment advisor or financial planner can help tailor these rules to your specific situation.

Call for analysis your financial challenges

I would like to take this opportunity to draw your attention to this week’s article in the I Comment Your Money column. In this new column, I comment and clarify readers’ financial challenges. If you wish, I can comment on your question. To send your question, you can write an email to me describing the problem and putting in the title: Comment my money.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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